The July 2005 Senior Loan Officer Opinion Survey on Bank
Lending Practices addressed changes in the supply of, and demand for,
bank loans to businesses and households over the past three
months. The survey also queried banks about their current
holdings and recent originations and securitizations of nontraditional
mortgage products. This article is based on responses from
fifty-four domestic banking institutions and twenty U.S. branches and
agencies of foreign banks.

Domestic commercial banks reported a further easing of lending
standards and terms for commercial and industrial (C&I) loans and
commercial real estate loans over the past three months. At U.S.
branches and agencies of foreign banks, in contrast, lending standards
and terms for these types of loans were little changed over the same
period. On net, domestic banks experienced stronger demand for
C&I loans over the past three months, while foreign institutions
indicated that demand for business loans was about unchanged.
Both domestic and foreign institutions reported stronger demand for
commercial real estate loans, on balance. A notable net fraction
of domestic respondents reported stronger demand for loans to purchase
homes over the past three months, while a small net percentage of banks
also experienced a strengthening in demand for consumer loans. On net,
credit standards for residential mortgages and consumer loans were
about unchanged in the July survey, but a significant proportion of
respondents indicated increased willingness to make consumer
installment loans.

In response to a set of special questions on nontraditional mortgage
products, domestic banks generally reported that such loans accounted
for less than a quarter of their residential mortgage originations and
of the mortgages on their books. More than one-half of
respondents, however, noted that the share of mortgage originations
accounted for by nontraditional mortgage products had been higher over
the past twelve months than over the previous twelve-month period.

C&I Lending(Table 1, questions 1-6; Table 2, questions 1-6)

In the July survey, domestic banks reported a further net easing of
standards and terms for C&I loans. About 15 percent of
respondents, on net, reported having eased their credit standards for
loans to large and middle-market firms over the past three months, a
slightly lower net fraction than in recent surveys. On balance,
50 percent of domestic banks indicated that they had reduced the costs
of credit lines for such firms in July, up from 40 percent in the April
survey. About 45 percent--a somewhat smaller net percentage than
in the previous survey--reported that they had narrowed spreads of loan
rates over their cost of funds. Domestic respondents also
reported having eased other lending terms over the past three
months: More than one-fifth of banks, on net, increased the
maximum size and the maximum maturity of credit lines they are willing
to extend to large and middle-market firms. In contrast, U.S.
branches and agencies of foreign banks--customers of which are likely to
be larger firms--indicated that their lending standards and terms for
C&I loans were little changed over the past three months. For
C&I loans to small firms, 11 percent of domestic banks, on net,
noted that they had eased their lending standards--down from almost 25
percent in April--and about one-third of respondents reported having
trimmed spreads of loan rates over their cost of funds.

As in recent surveys, almost all domestic banks that reported having
eased their lending standards and terms in the July survey cited
more-aggressive competition from other banks or nonbank lenders as an
important reason for having done so. Large fractions of those
respondents also cited an increased tolerance for risk and a more
favorable or less uncertain economic outlook as reasons for their move
toward a less-stringent lending posture.

Demand for business loans reportedly strengthened over the past three
months. Forty percent of domestic banks saw stronger demand for
C&I loans from large and middle-market firms, on balance--about the
same share as in the April survey. In contrast, foreign
institutions reported that demand for C&I loans was about unchanged
over the past three months. About one-third of domestic
respondents also experienced stronger loan demand from small
firms. As was the case in the April survey, a large majority of
the domestic respondents that saw stronger loan demand pointed to
borrowers' increased financing needs for accounts receivable and
inventories as well as for investment in plant and equipment as having
driven the rise in demand. A substantial fraction of domestic
banks also pointed to a rise in merger and acquisition activity as
having boosted demand for C&I loans. Regarding future
business, 27 percent of domestic and 16 percent of foreign respondents,
on net, indicated that inquiries from potential business borrowers had
increased over the past three months, down from about 40 percent and 20
percent, respectively, in the April survey.

On net, 13 percent of domestic banks reported an easing of lending
standards on commercial real estate loans over the past three months,
about half the fraction that did so in the April survey. Only one
of the thirteen foreign branches and agencies active in commercial real
estate lending reported having eased standards for this type of
loan. Almost one-fourth of domestic respondents, on net,
experienced an increase in demand for commercial real estate loans over
the past three months, about the same share as in the April
survey. On net, 15 percent of foreign institutions indicated that
demand for this type of loan had increased, down from one-third in
April.

Lending to Households(Table 1, questions 9-24)

About one-fifth of domestic institutions reported in the July
survey that they had become more willing to make consumer installment
loans over the previous three months, a somewhat larger share than in
April. However, standards and terms on credit card and
non-credit-card consumer loans were reportedly little changed, on net,
over the same period. A modest net fraction of banks reported
stronger demand for consumer loans in the July survey.

Credit standards on residential mortgage loans were reportedly
unchanged in the July survey. Demand for mortgages to purchase
homes strengthened over the past three months: One-fifth of
domestic respondents, on net, reported stronger demand for such loans.

The July survey included a set of special questions on banks' current
holdings and recent originations and securitizations of residential
mortgages that could be categorized as nontraditional mortgage
products. These products include--but are not limited
to--adjustable-rate mortgages with multiple payment options,
interest-only mortgages, and so-called "Alt-A" products, such as
mortgages with limited income verification and mortgages secured by
non-owner-occupied properties.

About one-third of domestic respondents indicated that the share of
residential mortgages on their books that could be classified as
nontraditional mortgage products was less than 5 percent, and another
third reported that the share of such products was between 5 percent
and 15 percent. These shares are roughly similar if the responses
are weighted by the respondent banks' dollar volumes of residential
mortgages outstanding at the end of the first quarter. Only one
bank indicated that nontraditional mortgage products accounted for more
than one-half of residential mortgages on its books.

About one-third of domestic respondents reported that over the past
twelve months the share of their residential mortgage originations that
could be categorized as nontraditional products had been less than 5
percent. An additional 41 percent of respondents indicated that
their share of nontraditional mortgage originations was between 5
percent and 25 percent over the same period. Banks reporting
shares in this range accounted for 72 percent of all residential
mortgages on the books of the respondents at the end of the first
quarter, with the largest of them reporting shares between 16 percent
and 25 percent.

More than one-half of respondent banks indicated that the share of
nontraditional residential mortgage originations over the past twelve
months was higher than it had been over the previous twelve-month
period. Twelve percent of respondents noted that this share was
substantially higher.

A large majority of respondents reported that their bank had
securitized less than one-quarter of nontraditional mortgages
originated over the past year. These institutions accounted for
about one-half of the residential mortgages on the respondents'
books. In contrast, three large banks--which accounted for almost
40 percent of the respondents' residential mortgages
outstanding--indicated that the share of nontraditional mortgage
originations that had been securitized exceeded 75 percent. On
balance, a majority of the banks indicated that they were less likely
to securitize nontraditional mortgage products than traditional
mortgages. However, three large institutions--which accounted for
almost 40 percent of the residential mortgages of the
respondents--indicated that they were somewhat more likely to securitize
nontraditional mortgage products.

Banks were also asked about the share of residential mortgages on their
books used to finance purchases of second homes or homes for investment
purposes. A substantial majority of banks indicated that this
share was less than 10 percent. Banks with larger mortgage
portfolios reporting in this range generally reported higher
proportions of such mortgages. Most respondents also indicated
that over the past year, the share of residential mortgage originations
used to finance purchases of second homes or homes for investment
purposes was less than 10 percent. One-fourth of the respondents
noted that the share of originations accounted for by such loans was
moderately higher over the past twelve months than in the previous
twelve-month period. Banks with larger mortgage portfolios were
more likely to report an increase in this share.

This document was prepared by Fabio Natalucci with the research
assistance of Arshia Burney and Jason Grimm, Division of Monetary
Affairs, Board of Governors of the Federal Reserve System.